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May 8, 2013

U.S. Recovers as the World Watches: Schroders

Biggest risk for U.S. comes from individual companies, says Karl Dasher, new Schroders CEO of North America business

U.S. investors are well acquainted with market uncertainty and this nation’s wobbly economic recovery, but they’ve got nothing on worried investors elsewhere in the world.

So say investment managers with British-based Schroders who came to New York on Wednesday for a discussion of global opportunities in a world obsessed with quantitative easing, low bond yields, unemployment and the “disconnect” of almost disturbingly strong stock market growth.

“The disconnect between markets and the economy creates very interesting challenges and opportunities for investors over the next few years,” said Alan Brown, Schroders senior advisor, in introducing a panel discussion that revolved around the relative strength of U.S. markets.

Schroders is still expanding its foothold in the U.S., but the firm is a household name in 27 countries around the globe, managing $345 billion in assets as of Dec. 31. In comparison, BlackRock's assets under management total $3.8 trillion across equity, fixed income, cash management, alternative investment, real estate and advisory strategies.

Karl Dasher, the incoming Schroders North America CEO who currently oversees $68.8 billion in global fixed income assets, said that individual companies’ “idiosyncratic” risk is the biggest risk today for U.S. credit. He pointed to this spring’s $28 billion leveraged buyout of H.J. Heinz Co. as an example of what he believes will be an LBO trend as shareholders pressure companies for better return on equity.

Meanwhile, Dasher said, the high yields that the U.S. bond markets experienced over the last 30 years are an historical anomaly. More typical are the low yields of today, dating back centuries, he noted. Plus, the foreign exchange markets are returning to their role of being the place where rebalancing among economies happens. Another trend he foresees is more adjustments through currency rates.

“Our message to bond investors is that you’ll have to take a more focused approach to generate a return of 2% or more above inflation, not nominal,” Dasher said.

For all the pressure on central banks, they’ve engineered a graceful recovery, “but we’ve got to get off the steroid of quantitative easing,” Dasher said, adding that the high U.S. debt-to-GDP ratio is forcing the Federal Reserve to keep printing money.

Virginie Maisonneuve, who oversees $17 billion in global equities for Schroders, believes that an early end to QE due to strong economic conditions and a substantial improvement in the labor market would be an encouraging sign for equity markets. This would suggest that the Fed believes the U.S. recovery has enough momentum to sustain itself. Meanwhile, Maisonneuve said, Europe is still a source of volatility, “but Asia also might be.”

Strikingly, Maisonneuve said that investors globally continue to fear cyclical stocks, and so they’re still in defensive stocks such as utilities, which have a lot of the characteristics of bonds.

Overall, Schroders North America is overweight U.S. equities. The Schroder North American Equity Fund (Advisor shares: SNAVX), rated three stars by Morningstar, has a 56% ranking in the 1,709 funds in its category. SNAVX three-year annualized returns total 14.69%, 1.30% below the S&P 500 benchmark index.